1. The Market Forces of
Supply and Demand
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
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2. Markets and Competition
• Market
– A group of buyers and sellers of a
particular good or service
– Buyers
• Determine the demand for the product
– Sellers
• Determine the supply of the product
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3. Markets and Competition
• Competitive market
– Market in which there are many buyers
and many sellers
– Each has a negligible impact on market
price
– Price and quantity are determined by all
buyers and sellers
• As they interact in the marketplace
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4. Demand
• Quantity demanded
– Amount of a good that buyers are willing
and able to purchase
• Law of demand
– Other things equal, when the price of the
good rises
• Quantity demanded of a good falls
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5. Demand
• Demand schedule - a table
– Relationship between the price of a good
and quantity demanded
• Demand curve - a graph
– Relationship between the price of a good
and quantity demanded
• Individual demand
– Demand of one individual
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6. Figure 1
Catherine’s Demand Schedule and Demand Curve
Price of Ice-Cream Cones
1. A decrease
Price of Quantity of $3.00
in price . . .
Ice-Cream Cones
Cone Demanded 2.50
2. . . . increases quantity
$0.00 12 cones 2.00
of cones demanded.
0.50 10
1.00 8 1.50
1.50 6 1.00 Demand curve
2.00 4
2.50 2 0.50
3.00 0
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
The demand schedule is a table that shows the quantity demanded at each price. The demand
curve, which graphs the demand schedule, illustrates how the quantity demanded of the good
changes as its price varies. Because a lower price increases the quantity demanded, the
demand curve slopes downward.
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7. Demand
• Market demand curve
– Sum the individual demand curves
horizontally
– Total quantity demanded of a good varies
• As the price of the good varies
• Other things constant
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8. Figure 2
Market Demand as the Sum of Individual Demands
Catherine’s demand + Nicholas’s demand = Market demand
Price of Price of Price of
Ice-Cream Ice-Cream Ice-Cream
Cones Cones Cones
$3.00 DCatherine $3.00 $3.00
DNicholas
2.50 2.50 2.50
2.00 2.00 2.00
1.50 1.50 1.50 DMarket
1.00 1.00 1.00
0.50 0.50 0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
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9. Demand
• Shifts in the demand curve
– Increase in demand
• Any change that increases the quantity
demanded at every price
• Demand curve shifts right
– Decrease in demand
• Any change that decreases the quantity
demanded at every price
• Demand curve shifts left
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10. Figure 3
Shifts in the Demand Curve
Price of
Ice-Cream Increase in
Cones Demand
Decrease in
Demand
Demand
Demand
Demand curve, D1
curve, D2
curve, D3
0
Quantity of Ice-Cream Cones
Any change that raises the quantity that buyers wish to purchase at any given price
shifts the demand curve to the right. Any change that lowers the quantity that buyers
wish to purchase at any given price shifts the demand curve to the left.
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11. Demand
• Variables that can shift the demand curve
– Income
– Prices of related goods
– Tastes
– Expectations
– Number of buyers
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12. Demand
• Income
– Normal good
• Other things constant
• An increase in income leads to an increase in
demand
– Inferior good
• Other things constant
• An increase in income leads to a decrease in
demand
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13. Demand
• Prices of related goods
– Substitutes - two goods
• An increase in the price of one
• Leads to an increase in the demand for the
other
– Complements – two goods
• An increase in the price of one
• Leads to a decrease in the demand for the
other
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14. Demand
• Tastes
– Change in tastes – changes the demand
• Expectations about the future
– Expect an increase in income
• Increase in current demand
– Expect higher prices
• Increase in current demand
• Number of buyers – increase
– Market demand - increases
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15. Table 1
Variables That Influence Buyers
This table lists the variables that affect how much consumers choose to buy of any
good. Notice the special role that the price of the good plays: A change in the good’s
price represents a movement along the demand curve, whereas a change in one of
the other variables shifts the demand curve.
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16. Two ways to reduce the quantity of smoking demanded
1. Shift the demand curve for cigarettes
and other tobacco products
– Public service announcements
– Mandatory health warnings on cigarette
packages
– Prohibition of cigarette advertising on
television
• If successful
– Shift demand curve to the left
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17. Two ways to reduce the quantity of smoking demanded
2. Try to raise the price of cigarettes
– Tax the manufacturer
• Higher price
– Movement along demand curve
• 10% ↑ in price → 4% ↓ in smoking
• Teenagers: 10% ↑ in price → 12% ↓ in
smoking
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18. Figure 4
Shifts in the Demand Curve versus Movements along the Demand Curve
(a) A Shift in the Demand Curve (b) A Movement along the Demand Curve
Price of Cigarettes, per Pack Price of Cigarettes, per Pack
A policy to discourage An increase in the price
smoking shifts the of cigarettes results in a
demand curve to the left movement along the
demand curve
$4.00
C
B A
$2.00 2.00
A
D1
D2 D1
0 10 20 0 12 20
Number of Cigarettes Smoked per Day Number of Cigarettes Smoked per Day
If warnings on cigarette packages convince smokers to smoke less, the demand curve for cigarettes shifts to
the left. In panel (a), the demand curve shifts from D1 to D2. At a price of $2.00 per pack, the quantity
demanded falls from 20 to 10 cigarettes per day, as reflected by the shift from point A to point B. By contrast, if
a tax raises the price of cigarettes, the demand curve does not shift. Instead, we observe a movement to a
different point on the demand curve. In panel (b), when the price rises from $2.00 to $4.00, the quantity
demanded falls from 20 to 12 cigarettes per day, as reflected by the movement from point A to point C.
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19. Supply
• Quantity supplied
– Amount of a good
– Sellers are willing and able to sell
• Law of supply
– Other things equal
– When the price of the good rises
• Quantity supplied of a good rises
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20. Supply
• Supply schedule - a table
– Relationship between the price of a good
and the quantity supplied
• Supply curve - a graph
– Relationship between the price of a good
and the quantity supplied
• Individual supply
– Supply of one seller
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21. Figure 5
Ben’s Supply Schedule and Supply Curve
Price of Ice-Cream Cones
Supply curve
Price of Quantity
Ice-cream Of Cones $3.00
1. An increase
Cone Supplied
2.50 in price . . .
$0.00 0 cones
0.50 0 2.00
1.00 1
1.50 2. . . . increases
1.50 2
2.00 3 quantity of cones
1.00
2.50 4 supplied.
3.00 5 0.50
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
The supply schedule is a table that shows the quantity supplied at each price. This supply curve,
which graphs the supply schedule, illustrates how the quantity supplied of the good changes as
its price varies. Because a higher price increases the quantity supplied, the supply curve slopes
upward.
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22. Supply
• Market supply curve
– Sum of individual supply curves
horizontally
– Total quantity supplied of a good varies
• As the price of the good varies
• All other factors that affect how much
suppliers want to sell are hold constant
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23. Figure 6
Market Supply as the Sum of Individual Supplies
Ben’s supply + Jerry’s supply = Market supply
Price of Price of Price of
Ice-Cream Ice-Cream Ice-Cream
Cones Cones Cones
SBen
SMarket
$3.00 $3.00 SJerry $3.00
2.50 2.50 2.50
2.00 2.00 2.00
1.50 1.50 1.50
1.00 1.00 1.00
0.50 0.50 0.50
0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 0 2 4 6 8 1012141618
Quantity of Quantity of Quantity of
Ice-Cream Cones Ice-Cream Cones Ice-Cream Cones
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24. Supply
• Shifts in supply
– Increase in supply
• Any change that increases the quantity
supplied at every price
• Supply curve shifts right
– Decrease in supply
• Any change that decreases the quantity
supplied at every price
• Supply curve shifts left
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25. Exhibit 7
Shifts in the Supply Curve
Price of Supply Supply Supply
Ice-Cream curve, S3 curve, S1 curve, S2
Cones
Decrease
In supply
Increase in
Supply
0
Quantity of Ice-Cream Cones
Any change that raises the quantity that sellers wish to produce at any given price
shifts the supply curve to the right. Any change that lowers the quantity that sellers
wish to produce at any given price shifts the supply curve to the left.
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26. Supply
• Variables that can shift the supply curve
– Input Prices
– Technology
– Expectations about future
– Number of sellers
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27. Supply
• Input Prices (costs)
– Supply – negatively related to prices of
inputs
– Higher input prices – decrease in supply
• Technology
– Advance in technology – increase in
supply
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28. Supply
• Expectations about future
– Affect current supply
– Expected higher prices
• Decrease in current supply
• Number of sellers – increase
– Market supply - increase
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29. Table 2
Variables That Influence Sellers
This table lists the variables that affect how much producers choose to sell of any
good. Notice the special role that the price of the good plays: A change in the good’s
price represents a movement along the supply curve, whereas a change in one of the
other variables shifts the supply curve.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. Supply and Demand Together
• Equilibrium - a situation
– Supply and demand forces are in balance
– A situation in which market price has
reached the level where
• Quantity supplied = quantity demanded
– Supply and demand curves intersect
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31. Supply and Demand Together
• Equilibrium price
– Balances quantity supplied and quantity
demanded
– Market-clearing price
• Equilibrium quantity
– Quantity supplied and quantity demanded
at the equilibrium price
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32. Figure 8
The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cones Equilibrium Supply
$3.00
2.50
Equilibrium
2.00 Equilibrium
price
quantity
1.50
1.00
Demand
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
The equilibrium is found where the supply and demand curves intersect. At the
equilibrium price, the quantity supplied equals the quantity demanded. Here the
equilibrium price is $2.00: At this price, 7 ice-cream cones are supplied, and 7 ice-
cream cones are demanded.
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33. Supply and Demand Together
• Surplus
– Quantity supplied > quantity demanded
– Excess supply (surplus)
– Downward pressure on price
• Movements along the demand and supply
curves
• Increase in quantity demanded
• Decrease in quantity supplied
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34. Supply and Demand Together
• Shortage
– Quantity demanded > quantity supplied
– Excess demand (shortage)
– Upward pressure on price
• Movements along the demand and supply
curves
• Decrease in quantity demanded
• Increase in quantity supplied
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35. Figure 9
Markets Not in Equilibrium
Price of (a) Excess Supply Price of (b) Excess demand
Ice-Cream Ice-Cream
Cones Surplus Supply Cones Supply
$2.50
2.00 $2.00
1.50
Demand Demand
Shortage
Quantity Quantity Quantity Quantity
demanded supplied supplied demanded
0 4 7 10 0 4 7 10
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the quantity
supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to increase sales by cutting the
price of a cone, and this moves the price toward its equilibrium level. In panel (b), there is a shortage. Because
the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the
quantity supplied (4 cones). With too many buyers chasing too few goods, suppliers can take advantage of the
shortage by raising the price. Hence, in both cases, the price adjustment moves the market toward the
equilibrium of supply and demand
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36. Supply and Demand Together
• Law of supply and demand
– The price of any good adjusts
• To bring the quantity supplied and the
quantity demanded for that good into balance
– In most markets
• Surpluses and shortages are temporary
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37. Supply and Demand Together
• Three steps to analyzing changes in
equilibrium
1. Decide whether the event shifts the
supply curve, the demand curve, or, in
some cases, both curves
2. Decide whether the curve shifts to the
right or to the left
3. Use the supply-and-demand diagram
• Compare the initial and the new equilibrium
• Effects on equilibrium price and quantity
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38. Supply and Demand Together
• A change in market equilibrium due to a
shift in demand
– One summer - very hot weather
– Effect on the market for ice cream?
1.Hot weather – shifts the demand curve
(tastes )
2.Demand curve shifts to the right
3.Higher equilibrium price; higher
equilibrium quantity
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39. Figure 10
How an increase in demand affects the equilibrium
Price of 1. Hot weather increases the
Ice-Cream demand for ice cream . . .
Cones Supply
2. …resulting in
a higher price . . .
New equilibrium
$2.50
Initial equilibrium
2.00
3. …and a higher
D1 D2
quantity sold.
0 7 10 Quantity of Ice-Cream Cones
An event that raises quantity demanded at any given price shifts the demand curve to the right.
The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer
causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes
the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10
cones.
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40. Supply and Demand Together
• A change in market equilibrium due to a
shift in supply
– One summer - a hurricane destroys part
of the sugarcane crop: higher price of
sugar
– Effect on the market for ice cream?
1.Change in price of sugar - supply curve
2.Supply curve - shifts to the left
3.Higher equilibrium price; lower equilibrium
quantity
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41. Figure 11
How a Decrease in Supply Affects the Equilibrium
Price of 1. An increase in the price of sugar reduces
Ice-Cream the supply of ice cream . . .
Cones New equilibrium S2
2. …resulting in
a higher price . . .
S1
$2.50
2.00
Initial equilibrium
3. …and a smaller
quantity sold.
Demand
0 4 7 Quantity of Ice-Cream Cones
An event that reduces quantity supplied at any given price shifts the supply curve to the left. The
equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of sugar
(an input) causes sellers to supply less ice cream. The supply curve shifts from S 1 to S2, which
causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium
quantity to fall from 7 to 4 cones.
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42. How Prices Allocate Resources
• Prices
– Signals that guide the allocation of
resources
– Mechanism for rationing scarce resources
– Determine who produces each good and
how much is produced
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.